When Prosper began back in 2006 they encouraged borrowers to form groups. A group consisted of a group leader and a bunch of borrowers who all shared something in common. The idea being that having some social connection between borrowers would reduce delinquencies.
Back then these groups were described as “the heart of the Prosper marketplace” and borrowers often received better rates by being a member of a group. Also, group leaders were sometimes given monetary rewards for recruiting borrowers on to the platform.
Fast forward five years and groups have been very much de-emphasized at Prosper. I think the main reason is that groups didn’t really make a big difference to defaults. As a borrower, if you are a member of a group, your loan has to be approved by the group leader before it becomes live on the platform.
But groups haven’t gone away. You have to search for a link to the groups page om Prosper but there are several groups that are still active and some are doing very well for investors.
LendersClub and Socorro Capital Partners
According to Lendstats, the LendersClub group is the number one group (with more than 50 issued loans) for investors on Prosper. Their 15.9% return and less than 1% default rate are certainly very impressive. Particularly when you consider LendersClub started back in the Prosper 1.0 days.
Socorro Capital Partners (SCP) is also doing well for investors with a 13.9% return according to Lendstats – they have also just had one default. Full disclosure, I am a member of this group and also a supporter of LendersClub.
I contacted the leaders of both groups to get some background on their group and to chat briefly about the groups concept. Below is our dicsussion.
SLN: When did you start on Prosper and when did you form your group? JGuide: I started the group after about 6 months of lending in 2008. Jason: I also started in 2008 and formed SCP about two months after I began investing.
SLN: Why did you start a group? JGuide: . I started LendersClub originally for a number of other military members to share tips and good investment work we did. Soon we allowed others (non military lenders) to join. Jason: SCP was one of the first lender groups on Prosper (as opposed to groups focused on borrowers). I formed the group to network with other investors and bounce ideas around. At the time Prosper was also encouraging groups with a 0.5% bonus for group leaders.
SLN: How do you go about vetting borrower members? JGuide: For borrowing members we look at if the member can afford the listings/loan – often we turn them down as a group listing and help them find a bank product (especially USAA) that better meets their needs. Jason: I like to talk with borrowers on the phone to get a feel for whether they can afford the loan. I like borrowers to also have an investor account and will only approve loans as a group listing if I am very confident in the borrower.
SLN: Do you actively promote your group to try and get new investor members? JGuide: The group mostly grows on it’s own – although I did invite a number of folks in the beginning. Jason: If I see a lender investing in the same kinds of loans that I invest in I will sometimes reach out to them. But these investors need to be active and frequent investors.
SLN: How do you feel about the de-emphasis on groups at Prosper? JGuide: Prosper made the right call in de-emphasing groups – it was not working as most groups had as many if not more defaults as non groups. At some point Prosper should consider bringing groups back. Properly managed a group can have a much lower default rate. Jason: At one stage I thought they were going to eliminate groups on Prosper but I am glad they decided to keep them going even though they are not promoting them.
The other benefit of being in a group from an investor perspective is education. JGuide sends out regular emails to group members that always has great content including a tip of the day. I have actually learned quite a lot from these emails. Jason at SCP also send out emails whenever he approves a group listing and will also send some educational content.
What is the Future for Groups?
It is interesting that when Prosper launched in 2006 the social aspect of the web was really only just beginning, Today, it seems that nearly everyone has a Facebook or Twitter account and the web is far more social than it has ever been. Maybe Prosper groups were just ahead of their time?
The idea of groups certainly has tremendous potential but there are two big hurdles as I see it. Privacy and anti-discrimination. A borrower may not want everyone in their group to know their income, mortgage and credit card payments. Then there is the federal law that prevents discrimination in lending decisions which could become an issue in a more socially connected lending environment.
Even though they have been de-emphasized it doesn’t look like Prosper groups are going away. If they wanted to abandon them they probably would have done so already. And I know that CEO Chris Larsen still likes the idea of a more social p2p lending platform.
What do you think? Are Prosper groups a good or bad idea? Are you a member of a group? Let me know in the comments.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.